California-based Franklin Templeton’s specialist investment managers outline their outlooks for the global economy and asset classes in 2025.

Zehrid Osmani, portfolio manager at Martin Currie, an independent specialist investment manager within the Franklin Templeton Group, sees opportunities from global equities in 2025. These are driven by three thematic trends – the energy transition, ageing populations and, most importantly, artificial intelligence.

Out of his three thematic trends, Osmani thinks that artificial intelligence will bring a seismic shift to the disruption rate faced by companies throughout the world. At the same time, AI is likely to lead to a significant acceleration in innovation potential and breakthroughs across many fields of the economy. He sees more support for companies that can monetise the significant investment cycle brought by this AI revolution. He favours the enablers of AI to generate long-term growth, specifically those involved in the design and production of semiconductors, not to mention the cloud hyperscalers.

For long-term investors, Osmani thinks that this opens up good areas of opportunities. But it also highlights the need to be vigilant in terms of disruption risk on established business models, and to ensure that disruption risk is assessed in a detailed, structured and analytical approach. “Equally, at times like this, a strict valuation discipline is vital to see through the froth that is appearing in some areas of the market,” he said.

Meanwhile, Francis Gannon, co-chief investment officer at Royce Investment Partners, sees an advantage in small cap equities over large cap following both interest rate cuts and the elections.

US equities
With US President-elect Donald Trump expected to bring a potentially lower tax and lighter regulatory touch to his presidential second term, the market expects productivity to rise and capital investment to increase over the next several years, according to Scott Glasser, chief investment officer at ClearBridge Investments.

In his view, the initial impacts of Trump’s victory are likely to be directionally consistent with 2016, favouring value, small capitalisation and cyclical stocks, albeit to a lesser degree given a more mature economic backdrop and current lofty valuations.

Nonetheless, liquidity – the primary driver of bull and bear markets, in his opinion – continues to be plentiful with credit spreads near all-time lows, capital markets' funding is wide open (corporate high yield issuance is +44 per cent year to date through October) and the yield curve is positively sloped for the first time in two years. Therefore, although near-term ebullient sentiment could create some volatility, Glasser believes that the markets’ long-term outlook remains healthy.

Jeff Schulze, head of economic and market strategy at ClearBridge Investments, also thinks that the pace of expansion is likely to stay buoyant in 2025 as the US economy rides the tailwinds of both a fiscal impulse, courtesy of Trump’s election win, a Republican sweep of Congress, and a monetary impulse from the Federal Reserve’s pivot to a rate-cutting cycle.

Emerging market equities
Despite a significant variation in individual performance, share prices of emerging market (EM) equities have responded to changes in investment conditions, both nationally and sectorally, according to Paul Desoisa, portfolio manager at Martin Currie. He believes that the long-term investment outlook for emerging markets remains robust. 

The market persistently undervalues high-quality, sustainable growth EM companies. He is excited by the synergy of the technology adoption, urbanisation and services sector growth prevalent in emerging markets. In the current market, strong sustainability characteristics are vital to obtaining long-term value creation, he said.

Desoisa believes that strong economic growth, an improving inflationary environment and easing interest rates should be supportive of emerging market equities in 2025. He thinks that markets will refocus on company fundamentals. The key building blocks for growth are those operating in several areas, including information technology, with emerging market companies being at the heart of AI innovation. He also expects a return to fundamentals in India and expects to see policy support and valuation opportunities in China.

Fixed income
As we approach 2025, Michael Buchanan, chief investment officer at Western Asset, believes that the US economy remains resilient and only a moderate slowdown is anticipated without a recession, aligning with the global disinflation trend. However, a unified government under Trump could drive higher bond issuance and might put upward pressure on bond yields.

In 2025, Buchanan anticipates developed market central banks will reduce rates further due to diminishing inflation concerns. The US Federal Reserve, European Central Bank and Bank of England are expected to continue easing, while Japan could tighten further. However, potential inflation from new Trump policies could lead the Fed to pause or move at a slower pace.

Buchanan believes that Europe could see lacklustre growth and fiscal retrenchment in 2025. China's recent stimulus could temper cyclical headwinds, but structural issues in the property sector and local government debt persist. In emerging markets, opportunities are selective; India and Brazil are demonstrating strong fundamentals, though political risks may still affect performance.

Buchanan expects fixed income to perform positively in 2025, and sees opportunities across various sectors, including top-quality global banks, select EM sovereign debt and agency mortgage-backed securities (MBS) as well as opportunities in commercial mortgage-backed securities (CMBS). In addition, fundamentals in corporate credit should remain supportive and allow for reasonably stable spreads.

Meanwhile, Paul Mielczarski, head of global macro strategy at Brandywine Global, believes that fixed income investors will face elevated macroeconomic uncertainty in 2025 due to possible policy shifts under the Trump administration. Nevertheless, after 15 years of low to negative returns from sovereign bonds, allocators are now favouring high yield credit over sovereigns.

Mielczarski finds the US and UK bond markets relatively attractive after the sharp sell-off in the past two months. This is especially true given the historically high valuations of US equities. Ultimately, he sees more downside risks to global growth from Trump’s policy priorities with smaller upside risks to global inflation.

Rob Amodeo, head of municipals at Western Asset, also anticipates positive fixed income tailwinds of declining inflation and slower US economic growth driving favourable outcomes for the municipal bond market in 2025. Generationally high tax-exempt income levels, robust supply conditions and resilient fundamentals have improved the long-term value proposition of the municipal asset class and provided an attractive entry point for taxable investors as the Federal Reserve embarks on a rate-cutting cycle. 

Global infrastructure
With 2024 returns dominated by the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla), and more recently cyclical stocks surrounding the US presidential election, infrastructure’s differentiated returns offer some diversification away from the risks of concentrated trades. And with Trump’s policies potentially leading to a second round of inflation, infrastructure’s inflation pass-through mechanism will likely be more valuable in 2025, according to Nick Langley, Shane Hurst and Charles Hamieh, portfolio managers at ClearBridge Investments.

Infrastructure has historically outperformed global equities as rate hikes end. With global central banks easing policy, breadth has improved with the market beginning to recognise infrastructure’s strong fundamentals and secular themes. These include decarbonisation, growing power demand from AI and data growth, and significant network investments to replace ageing assets, improve resiliency and meet the needs of realigning supply chains and onshoring trends.

(Royce Investment  Partners, ClearBridge Investments, Western Asset, and Brandywine Global, all fall within the umbrella of the Franklin Templeton Group.)